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Q.No.1. Both the shareholders of the Private Company died in a car accident. Decide

whether Companys existence also comes to an end.

Sol.: The Companys existence is not affected by the death of its shareholders, since

the Company has separate legal entity. This is clearly established in Salomon Vs.

Salomon & Co. Ltd, Lee Vs. Lee Air farming Ltd &Kandoli tea Co. Ltd. cases. Further theCompany has having perpetual succession.

Q.No.2. In a private limited Company it is discovered that there are, in fact,

54members. On an enquiry, it is ascertained that 6 of such members have been

employees of the Company in the recent past and that they acquired their shares while

they were still employees of the Company. Is it necessary to convert the Company into

a public limited Company?

Sol.: As per Section 3(1)(iii), a Company to be registered as a private Company must

restrict its membership to 50 only. But, however, in counting this number of 50

members, employee members and ex-employee members (i.e., those who become

members while in the employment of the Company but now having retired still continue

to retain membership) are to be excluded. Thus, in the given case, the Company shall

continue to be a private Company. There is no need for conversion.

Q.No.3. The paid up share capital of Advanced Castings Pvt. Ltd is Rs. 1,00,00,000

consisting of 8,00,000 Equity shares ofRs. 10 each fully paid up and 2,00,000

cumulative Preference shares ofRs. 10 each fully paid up. Quality Forgings Pvt. Ltd. and

Supreme Engineering Pvt. Ltd. are holding 3,00,000 Equity shares and 1,50,000 Equity

shares respectively in Advanced Castings Pvt. Ltd. Quality Forgings Pvt. Ltd. and

Supreme Engineering Pvt. Ltd are the subsidiaries of Unique Machineries Pvt. Ltd.

Examine whether Advanced Castings Pvt. Ltd. is a subsidiary of Unique Machineries Pvt.

Ltd. Will your answer be different, if Unique Machineries Pvt. Ltd. controls composition

of Board of Directors of Advanced Casting Pvt. Ltd.?

Sol.: Holding & Subsidiary Co.s. According to section 4 of the Companies Act, a

Company (Assume S Ltd.) shall be deemed to be a subsidiary of another Company

(Assume H Ltd.), if & only if:

1. Control on BOD. That the H Ltd. controls the composition of Board of directors of S

Ltd.Or

2. Control by ownership.

a. Where S Ltd. is an existing Company in which the preference shareholders arehaving voting rights, H Ltd. controls more than half of the total voting power of S Ltd.

(E + P)

b. Where S Ltd. is a newly formed Company, H Ltd. holds more than half in the nominal

value of S Ltd. equity share capital (Only E) Or

3. Chain relation. If S Ltd. is a subsidiary of A Ltd. which is subsidiary of H Ltd., then

the Company S Ltd. is subsidiary of H Ltd.

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Further shares held by any person as a nominee for the Co. shall be treated as being

held by the said Co. Thus, the shares held by a subsidiary shall be treated as held by

the Holding Co. In this case, the equity share capital of Advance Castings Private Ltd.

is Rs. 80,00,000 consisting of 8,00,000 Equity shares ofRs. 10 each fully paid up.

Quality Forgings Pvt. Ltd. and Supreme Engineering Pvt. Ltd. are holding 4,50,000

(3,00,000+1,50,000) Equity shares in Advance Castings Pvt. Ltd. As these twoCompanies are the subsidiaries of Unique Machineries Pvt. Ltd., it will be treated as

holding more than half in nominal value of the Equity share capital of Advance Castings

Pvt. Ltd. and hence Advance Castings Pvt. Ltd. is a subsidiary of Unique Machineries

Pvt. Ltd.

If Unique Machineries Pvt. Ltd. control the composition of the Board of Directors of

Advance Castings Pvt. Ltd., it will also be treated as holding Company by virtue of

Sec.4. Hence the answer will not be different.

Q.No.4. The paid-up share capital of XYZ (Private) Co. Limited is Rs. 20 lakhs consisting

of 2,00,000 Equity Shares ofRs. 10 each fully paid up. ABC (Private) Limited and its

subsidiary DEF (Private) Limited are holding 60,000 and 50,000 shares respectively in

XYZ (Private) Co. Limited. Examine with reference to the provisions of the Companies

Act, 1956, whether XYZ (Private) Limited is subsidiary of ABC (Private) Limited. Would

your answer be difference if DEF (Private) Limited is holding 1,10,000 shares in XYZ

(Private) Co. Limited and no shares are held by ABC (Private) Limited in XYZ (Private)

Co. Limited?

Sol.: Write about Holding & Subsidiary Companies in the above Question.

Further shares held by any person as a nominee for the Company shall be treated as

being held by the said Company. Thus, the shares held by a subsidiary shall be treated

as held by the holding Company.

Here ABC Private Limited is holding 60,000 shares in XYZ Private Limited and 50,000

shares held by DEF private limited. Therefore, ABC Limited will be deemed to be holding

1,10,000 Equity shares in XYZ Limited i.e. more than half in nominal value of the Equity

Share Capital of XYZ Private Ltd. Hence XYZ Private Limited is subsidiary of ABC Private

Limited.

The answer will remain the same in the second case but holding-subsidiary relationship

is established by virtue of Chain relationship i.e. a subsidiary of one Companys

subsidiary will also be considered as the subsidiary of the second mentioned Company.

Q.No.5. Advise Asiatic Government Security Life insurance Co. Ltd. Whether it can seekan injunction against The New Asiatic Insurance Co. Ltd. Which was subsequently

formed restraining it from having in its name the word Asiatic on the ground that it

has caused confusion and can deceive the public.

Sol.: The Companies Act, 1956 permits the promoters of a Company to choose any

suitable name for the Company provided the name chosen is not undesirable.

A name may be considered undesirable where it is too similar to the name of an already

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existing Company. In the present problem since the two Companies are in insurance

business, it may lead to a natural inference on the part of the public that the two are

interrelated because of the word Asiatic which is quite an imaginary word and does not

mean anything. Mere addition of the word New is not likely to give an otherwise

impression. Therefore, on a suit by Asiatic Government Security Life Insurance Co. Ltd.,

Court is likely to advise the New Asiatic Insurance Co. Ltd. to change its name.

Q.No.6. The plaintiffs contracted with a director of the defendant Company and gave

him a cheque under the contract. The Director could have been authorised under the

Companys articles, but was not in fact so authorized. The plaintiff had not seen the

Articles. The Director misappropriated the cheque and the plaintiffs sued the Co. Is the

Company liable?

Sol.: The problem relates to the protection that the outsider may claim against lack of

authority on the part of the officers of the Company. The rule commonly known as the

Doctrine of Indoor Management was first laid down in the case of The Royal British

Bank vs. Turquand. However, it has been held that the rule of indoor management

cannot be invoked in favour of a person who had no knowledge of the Articles of the

Company. It is because; in such a case the person cannot assume that the power (of

which he has no knowledge) has been exercised.

Thus, in the present case, Company shall not be held liable by the Act of the director

who has transacted beyond the scope of his authority. A principal can be held liable for

the frauds of his agent only to extent they are committed within the scope of the

authority conferred upon him.

Q.No.7. A Company issued a bond under its common seal signed by two Directors. The

Articles provided that the directors might borrow on bond such sums as they should be

authorized by an ordinary resolution of the Company. No such resolution was passed. Is

the Co. liable on the bond?

Sol.: Yes. The Company is liable on the bond. The outsiders dealing with the Company

are entitled to assume that as far as the internal proceedings of the Company are

concerned, everything has been regularly done. They are bound to read the registered

document and to see that the proposed dealing is not inconsistent therewith, but they

are not bound to do more; they need not inquire into the regularity of the internal

proceedings as required by the Memorandum or Articles. (Royal British Bank vs.Turquand). The gist of the rule is that persons dealing with limited liability Companies

are not bound to inquire into their indoor management and will not be affected by

irregularities of which they had no notice. The rule is based on public convenience and

justice.

Q.No.8. Theauthorised signatory of a Co. issued a share certificate in favour of X, which

apparently complied with the Companys articles as it was purported to be signed by

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two directors and the secretary and it had the Companys common seal affixed to it.

Infact, the secretary had forged the signatures of the Directors and affixed the seal

without any authority. Will the certificate be binding upon the Company?

Sol.: According to the doctrine of Indoor management, persons dealing with the

Company are presumed to have read the registered documents and to see that theproposed dealing is not inconsistent therewith, but they are not bound to do more i.e.

they need not enquire into the regularity of internal proceedings as required by M&A.

But, this rule cannot be applied to forgery. In the case of forgeries, the Acts done in the

name of the Company are void abinitio. A Co. can never be held bound by forgeries

committed by its officers.

Ruban Vs. Great Fingual Ltd.:

c The plaintiff was the transferee of a share certificate issued by the defendant co.

under its seal.

c The certificate was issued by the Companys secretary, who affixed the seal and

forged the signature of two directors.

c The certificate was held to be void.

Hence, it can be concluded that in the instant case, the certificate issued by the

secretary by having forged the signatures of the directors and affixed the seal without

any authority will not be binding upon the Company.

Q.No.26. The registered office clause of the memorandum of association of A ltd. does

not contained name of the city. Because of this registrar of Companies refused to

registered the memorandum of association. Is it Correct?

Sol.: No., Sec.13 states that the registered office clause shall contain the name of theState in which the registered office of the Company is situated. Further, it may be

noted that the address of the registered office is not stated in the memorandum of

association. If this was done, every change there in would require the amendment of

the memorandum, which is a difficult procedure. Therefore the address is stated in

AOA.

Q.No.32. X Co. Ltd, intended to buy a rubber in Peru. Its prospectus contained extracts

from an experts report giving the number of rubber trees in the estate. The report was

inaccurate. Will any shareholder buying the shares of the Co. on the basis of the above

representation have any remedy against the Co.? Can the persons authorising the issue

of prospectus escape from their liability?

Sol.: In the event of any mis-statement in a prospectus, the allottees have certain

remedies against the Company as well as those responsible for the issue of the

prospectus. Thus, in the present case, the allottee shall have the right to claim

compensation from the Company for any loss that he might have sustained in terms of

the value of shares. But, his claim against those responsible for issue of prospectus

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shall not succeed since they made the statement on the basis of the report of an expert

whom they believed to be competent. However, expert can be proceeded against.

Q.No.35. Amar subscribed shares issued by F Ltd. The prospectus of F Ltd. included a

statement which was misleading in the forms and contents. On the faith of the

prospectus believing it to be a true, Amar subscribed for shares and sustained loss. CanAmar sue for compensation of loss? If so, who will be sued for such loss?

Sol.: Yes, Amar can sue for compensation of loss. Sec.62 of the Companies Act

provides that an allottee is entitled to claim compensation from directors, promoters

and any other persons who authorised the issue of the false prospectus, for damages

sustained by reason of any untrue statement in it. However, he will have to prove that

misrepresentation was of material fact; he Acted on misrepresentation and has suffered

damages in consequence.

The following persons are liable to pay compensation for loss or damage sustained by

reason of untrue statement included in a prospectus:

a. Every person who is a director of the Company at the time of issue of prospectus.

b. Every person who has authorised himself to be named and is named in the

prospectus either as a director, or as having agreed to become a director, either

immediately or after an interval of time;

c. Every person who is a promoter of the Company; and

d.Every person who has authorised the issue of the prospectus.

Mr. Amar having sustained loss because of having believed the facts given in the

prospectus issued by F Ltd. to be true, can sue the four categories of persons

mentioned above for compensation of his loss. Apart, from above, the allottee may sue

the Company for damages for deceit.

Q.No.36. All statements in a prospectus issued by X & Co. Ltd. were literally true, but it

failed to disclose that the dividends stated in it as paid were not paid out of revenue

profits, but out of realised capital profits. The statement that the Company had paid

dividends for a number of years was true. But the Company had incurred losses for all

those years, however, no disclosure of this was made in the prospectus. An allottee of

shares wanted to avoid the allotment on the ground that the prospectus did not disclose

this fact which, in his opinion, was very material. Would he succeed?

Sol.: In the given case the Allottee of shares would succeed and he can avoid the

contract on the grounds of untrue statement included in the prospectus. As per Sec.65

a prospectus shall be deemed to include an untrue statement:a. If it contains a statement which is misleading in the form or content.

b. There is an Omission of any matter.

Nothing should be stated as fact which is not so, and no fact should be omitted. Thus it

is not necessary that there should be false representation in prospectus, even every

word included in it is true, the suppression of material facts may render it fraudulent.

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Q.No.37. Anallottee of shares in the Company has brought an action against director Q

in the Company in respect of false statements in the prospectus. The director has

contended that the statements were prepared by promoters and he had relied on them.

Is the director liable?

Sol.: Sec.62 lays down civil liabilities for misstatements in prospectus. It renders everyDirectors liable for any misstatement in prospectus. Sec.62(2), however, lays down the

circumstances under which the director concerned shall not be held liable. One of the

plea that the director can take is that he had reasonable ground to believe and did upto

the time of allotment of shares or debentures believe that the statement was true. In

the instant case the director can absolve himself of the liability if he proves that he had

reasonable grounds to believe and did believe that the statement prepared by the

promoters was true. The onus of proof is on the director.

Q.No.36. All statements in a prospectus issued by X & Co. Ltd. were literally true, but it

failed to disclose that the dividends stated in it as paid were not paid out of revenue

profits, but out of realised capital profits. The statement that the Company had paid

dividends for a number of years was true. But the Company had incurred losses for all

those years, however, no disclosure of this was made in the prospectus. An allottee of

shares wanted to avoid the allotment on the ground that the prospectus did not disclose

this fact which, in his opinion, was very material. Would he succeed?

Sol.: In the given case the Allottee of shares would succeed and he can avoid the

contract on the grounds of untrue statement included in the prospectus. As per Sec.65

a prospectus shall be deemed to include an untrue statement:

a. If it contains a statement which is misleading in the form or content.

b. There is an Omission of any matter.

Nothing should be stated as fact which is not so, and no fact should be omitted. Thus it

is not necessary that there should be false representation in prospectus, even every

word included in it is true, the suppression of material facts may render it fraudulent.

.No.40. The Directors of Vijay Electronics Ltd. allotted to themselves certain rights

shares for which no application was made by certain shareholders as required by

Section 81 of the Companies Act. Discuss the validity of their action specially in view of

the fact that market price of shares of the Company is 50% above par.

Sol.: If no application is made by the shareholders to whom the offer is made underSection 81 of the Companies Act, 1956, the Board of Directors may dispose of the

shares in such a manner as they think most beneficial to the Company. Therefore,

unless shares were allotted to directors on terms unfavourable to the Company, the

allotment would be valid.

Q.No.47. M Company Limited issued 2,00,000 Equity shares ofRs. 10 each. You are

allotted 100 shares. Explain any ten rights you have as a member of the Company.

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Sol.: Refer to question rights of members in membership lesson (10th lesson).

Q.No.48. Is a person, holding Pref. shares in a Co., deemed to be a member of that

Co.?

Sol.: Yes, a person holding preference shares in a Company is a member of that

Company Membership in a Company can be obtained, by acquiring shares in it and such

shares may be equity or preference. As such, a person holding preference shares shall

be deemed to be its member.

Q.No.49. Can a subsidiary Company hold shares in its holding Company? S Ltd. held

shares of H Ltd. before becoming its subsidiary. Will it be necessary for S Ltd. to

surrender those shares on its becoming a subsidiary of H Ltd.?

Sol.: As per Section 42, a body corporate cannot be a member of a Company which is

its holding Company and any allotment or transfer of shares in a Company to itssubsidiary shall be void; except:

a. Where the subsidiary holds shares in the holding Company in the capacity of a legal

representative of a deceased shareholder, or

b. Where the subsidiary holds shares as trustee, or

c. Where the subsidiary was a member before the commencement of this Act or it held

shares in the holding Company before it become its subsidiary. In these case the

subsidiary can continue to hold the shares but, without to vote at meetings of the

holding Company.

Since S Limited held shares of H Limited before it become its subsidiary, as per the

provisions of Section 42, it is not necessary for S Limited to surrender those shares on

its becoming a subsidiary of H Limited. S Limited in this case can continue to hold the

shares of H Limited, but S Limited will not have the right to vote at meeting of H

Limited in respect of the shares held by it.

Q.No.50. Shyams name appears in the register of members of a Company. Hecontends that he is not a member. The Company maintains that Shyam had orallyagreed to become the member. Is the contention of Shyam correct?

Sol.: Yes; the contention of Shyam is correct. According to Section 41 (2) of theCompanies Act, 1956, every person who agrees in writing to become a member of theCompany and whose name is entered in its register, shall be a member of the

Company. Agreement in writing can be either by way of application for allotment ofshares or by transfer/transmission of shares. The subscribers to the memorandum of a

Company are deemed to have agreed to become members of the Company and theirnames shall be entered in register of members on registration of the Company. There isno provision for becoming a member of the Company by oral agreement.

Q.No.51. DJA Co. Ltd. is holding 40% of total equity shares in MR Co. Ltd. The Board of Directors of MR Co. Ltd.

(incorporated on 1.1.1998) decided to raise the paid-up Equity Share Capital by issuing further shares and also

decided not to offer any shares to DJA Co. Ltd. on the ground that it was already holding a high percentage of shares

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in MR Co. Ltd. Articles of Association of MR Co. Ltd. provides that the new shares be offered to the existing

shareholders of the Co. On 1.3.2001 new shares were offered to all the shareholders excepting DJA Co. Ltd.

Referring to the provisions of the Companies Act, 1956 examine the validity of decision of Board of Directors of

MR Co. Ltd. of not offering any further shares to DJA Co. Ltd.

Sol.: The question is based on Sec.81 of the Companies Act. As per Sec.81 if, at any time after the expiry of 2 years

from the formation of the Company or after the expiry of 1 year from the first allotment of shares, which is earlier itis proposed to raise capital by allotment of further shares, it should be offered to the existing equity shareholders of

the Company. In the given case applying the provisions and the ruling in the above case, MR Companys decision

not to offer any further shares to DJA Co. Ltd. on the ground that DJA Co. Ltd. already holds a high percentage of

shareholding in MR Co. Ltd. is not valid for the reasons that it is against to Sec.81. Therefore Board of MR

Company Limited cannot take a decision not to allot shares to DJA Company Limited unless the same is approved

by the general meeting by means of special resolution required as under Sec. 81.

Q.No.54. Preference shareholders have same voting rights as the equity shareholders.

Sol.: False., In general they have voting right only on matters directly relating to rights attached to preference share

capital (E.g.: Resolution for winding up of Company, change in dividend rate) . (Sec.87)

Exception: But they are entitled to vote on every resolution placed before Company at any meeting, if dividend onsuch capital in full or in part is remaining unpaid in the case of:

cCumulative preference shares- If dividends are in arrears for two years preceding the date of

commencement of the meeting.

cNon-cumulative preference shares- If dividends are has not been paid for 2 financial years

immediately preceding the meeting or for any 3 years during the period of 6 years ending with the financial year

preceding the meeting.

Q.No.55. Reserve capital can be created out of net profits of the Company?

Sol.: False., Reserve capital is created out of capital of the Company. This is that part of the uncalled capital of the

Company which can be called up only in the event of its winding up. A limited Company may, by a special

resolution, determine that a portion of its uncalled capital shall be called up in the event of winding up for thepurposes of winding up (Sec. 99).

Q.No.76. The Chairman counts six votes in favour and seven against the resolution. Can the chairman cast his own

vote, which he had not exercised earlier, in favour of the resolution and also casting vote which the Articles

authorise and declare the resolution as passed?

Sol.: The Chairman after ascertaining the sense of the meeting by show of hands, that 6 votes are in favour and 7

are against the resolution, may before declaration of result cast his vote in favour of the resolution and also the

casting vote and declare the resolution as passed.

Q.No.82. XYZ Ltd. wants to hold its annual general meeting on Sunday, the 30th June to facilitate the share holders

to attend it. Advise the legal position.

Sol.: According to the provisions of Section 166(2) read with Section 171(1) every Annual General Meeting should

be called with at least 21 clear days notice and must be held on a day other than a public holiday i.e., it should be

held on a working day during business hours. It is clarified that if any day is declared by the Central Government to

be a public holiday after the issue of the notice convening such a meeting, it shall not be deemed to be a public

holiday in relation to the meeting. In view of the above mentioned provisions, XYZ Ltd. cannot hold the AGM on

Sunday, the 30th

June as Sunday is a public holiday.

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Quest. Under the Articles, the directors of a company had power to borrow up to Rs.20,000without the consent of the shareholders. The directors themselves lent Rs.40,000 to the company

without any consent of shareholders and took debentures. Is the company liable for Rs.40,000?

Ans: The company is liable only for Rs.10,000. As the shareholder have not given their consentfor Rs.35,000. they are not liable for the same.